Consumer advocates are warning about the spread of a “risky” new investment scheme that encourages distressed home owners to sell their properties on lay-by to buyers with low incomes or bad credit.
The complex deals are often orchestrated by start-up operators, many of whom may not have credit or real-estate licences and whose training has come from “boot camp” style investment seminars.
“These transactions can be risky and some consumers may not be protected by consumer credit laws,” said Carolyn Bond, co-chief executive of Victoria’s Consumer Action Law Centre.
“The houses may be overpriced, repayments high and, unlike a traditional mortgage, the buyer’s name is not put on the title of the property until they have purchased the house outright.”
The claims have been denied by operators and promoters, with leading instructor Rick Otton arguing the system helps families realise the Australian dream while turning a profit for investors at the same time.
Known as the “We Buy Houses” system, operators look for home owners in financial trouble or facing foreclosure and then connect them with a “buyer” who has little or no deposit, can’t qualify for a traditional mortgage, or has a poor credit history.
Participants are found through “guerilla style” marketing campaigns using brightly coloured hand-written signs posted on street corners, typically in blue-collar and mortgage-belt outer suburbs:
“Can’t pay mortgage? Need to sell fast?” one says, listing a phone number. “I Buy Houses And Pay $20,000 More”, another offers. “No fuss, no commission, fast sale!”
Ads can also be found on Gumtree and dozens of “We Buy Houses” websites and blogs, many of which promise vendors they can sell “for cash” and for buyers that “we give homes to those the banks don’t.”
But the deals actually involve complex “vendor finance” agreements where a buyer agrees to move into a house and make regular payments until the agreed purchase price is paid off or they are able to secure a home loan to repay the vendor in full.
If the buyer defaults, they lose all of their repayments and have no claim over the property.
In one recent case, CALC said a buyer forfeited all the money she paid into the scheme, as well as the first home owner’s grant that was used as a deposit, when she could no longer afford her payments less than a year after signing the agreement.
Vendors, who remain legally responsible for the property, may have to accept a below market price for their home or receive little or none of the monthly payments beyond what it takes to cover the mortgage. They also lose any right to future capital growth.
Operators — who refer to themselves as “transaction engineers” — receive a share or even the full amount of any deposit paid and a share of the monthly payments after costs. Some also charge the buyer an interest rate up to three percentage points above variable lending rates.
“We suspect that the middle-man might be the only one to benefit in some of these deals,” Ms Bond said, citing a recent case where the operator took 100 per cent of the deposit and profit.
Concerns are also being raised about the qualifications of the operators, some of whom may use a loophole in the National Credit Act that allows them to structure the deals without holding a credit licence from the Australian Securities and Investments Commission.
It involves repeatedly creating “one-off” joint-venture agreements with different vendors, meaning the operator may technically not be providing credit services as a business but a co-owner.
Many operators claim they are similarly exempt from state-based real-estate licensing requirements.
But Consumer Affairs Victoria said that anyone who acts on behalf of owners, buyers or tenants in the sale or leasing of property, including negotiating or preparing sale agreements, must hold an estate agent’s licence or be employed by a licensed real-estate agent.
David Siacci, president of the Vendor Finance Association of Australia, said reputable operators obtained ASIC credit licenses and received regular advice from solicitors.
“You have got a small minority of people out there, like in any industry, who do the wrong thing,” he said. “You can get a plumber that will do a fantastic job at a reasonable price, or you can get a plumber that will do a really shoddy job at an expensive price. We’re not the shoddy job people.”
Veteran operator and seminar educator Rick Otton said the “massive” growth seen in the industry was being driven by the property slump hurting people’s ability to sell their homes and the tougher lending requirements demanded by banks since the GFC.
“It’s like Harvey Norman with his TV sets. Let’s make it easy for someone to buy; it makes it easy for me to sell the house,” said Mr Otton, who has trained nearly 10,000 students through his seminar system.